Have you got an exit plan? The importance of estate planning

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Challenges of estate planning
Who’s getting what?
The lessons of history

Australia is in the early stages of an unprecedented intergenerational wealth transfer, with Australians aged 65 and over expected to hand down $3.5 trillion over the next two decades.

This was the finding of a landmark 2021 Productivity Commission report on wealth transfers. Between 2002 and 2018, an eye-watering $1.5 trillion was handed down, with 90% ($107 billion) in the form of inheritances and the remainder in gifts to family while the donor was still alive. The average inheritance was $125,000, although the median was a much smaller $45,000.

The wealth of older Australians has been buoyed by strong growth in housing prices and three decades of compulsory superannuation, along with low drawdown rates on these assets to fund retirement.

Given that today’s retirees have not had the full benefit of super during their working lives, the contribution of super to inheritances is likely to increase. The Productivity Commission forecast the average super death benefit would increase from $190,000 to $480,000 over 40 years.

With so much money at stake, planning is crucial, but planning how your assets will be distributed when you die is not always straightforward.

Challenges of estate planning

Unfortunately, many Australians report concerns about the smooth transfer of their assets to beneficiaries, a process known as estate planning.

An October 2023 report by Fidelity found managing the complexities of estate planning worried 35% of Australians over the age of 26, followed by a lack of knowledge and understanding of estate planning laws and regulations (33%). A lack of awareness about the importance and benefits of estate planning was also a concern (20%).

Rules are one thing, but for many people the major challenge to successful estate planning is closer to home, managing difficult family dynamics and conflicting expectations.

It’s important that your assets are distributed according to your wishes and your legacy doesn’t end up in a quagmire of family disputes.

Find out more about the documents that make up a comprehensive estate plan and what to consider if you need to provide for a disabled child

Who’s getting what?

Despite the jokes and bumper stickers suggesting retirees are merrily skiing (spending their kids’ inheritance), most people want to provide for their surviving partner and leave an inheritance for their children and grandchildren.

According to the Productivity Commission, about half of final estates goes to the ‘kids’, average age 50. The rest goes mostly to a surviving spouse or other family (such as grandkids or nieces and nephews) and friends. Only 2% goes to charity.

Simple. What could possibly go wrong?

Plenty as it turns out, especially where the final resting place of super is concerned.

These well-known court cases show how easily the best laid plans can unravel.

Katz v Grossman (2005) NSWSC 934.

Evelin and Erwin Katz were member/trustees of their SMSF.

When Evelin died, their daughter Linda Grossman was appointed trustee in her place, with Erwin the sole member of the fund. Erwin indicates in his Will that he wants his super divided equally between his two children, Linda and Daniel Katz, but he makes no binding death benefit nomination to that effect.

When Erwin dies, Linda appoints her husband as a trustee of the fund and they decide to pay the entire $1 million benefit to her.

Daniel takes the matter to the NSW Supreme Court which determines that Linda’s actions were legal and rules in her favour.

Ioppolo & Hesford v Conti (2013) WASC 389.

Francesca and Augusto Conti were both member/trustees of their SMSF but were estranged.

When Francesca died, two of her four children (Rosario and Grace) are appointed executors of her Will. Her Will stipulated that all her super benefits were to be paid to her four children and that none was to be paid to her estranged husband. On her death, Augusto retired as trustee and appointed a corporate trustee with himself as sole director. The trustee then paid Francesca’s total $648,586 benefit to Augusto.

Rosario and Grace take the matter to the WA Supreme Court, arguing they should have been made trustees on their mother’s behalf, but the court rules that Augusto was not obliged to appoint the executors as trustees and finds in his favour.

The lessons of history

The two court cases above highlight the importance of not just planning how you want your estate and your super to be distributed when you die but following through with correct documentation.

Some of the key issues to be mindful of where your super is concerned are:

The importance of binding death benefit nominations

Erwin Katz’s mistake was leaving only one of his children with control over his super fund. Even so, if he had made a binding death benefit nomination his wishes would have been carried out regardless of who took control of his fund.

If you have a valid binding death benefit nomination in place when you die, the trustee of your fund (whether it’s a public offer fund or an SMSF) will be bound to pay your super benefit to the people you specify in the proportions you nominate.

To be valid, a binding death benefit nomination must be renewed every three years unless you have a non-lapsing binding nomination. Non-lapsing nominations are not offered by all funds, so check if your fund or SMSF will allow it.

Check out these case studies illustrating different types of death benefit nominations.

Super is not an estate asset

Your super death benefit is not covered by your Will. You can, however, make a binding death benefit nomination instructing your super trustee to pay your death benefit to your estate, where it will be distributed according to your Will.

If Francesca had made a binding death benefit nomination to divide her super benefits equally between her four children, her wishes would have been carried out.

Whether you have an SMSF or are a member of a large fund regulated by the Australian Regulation Prudential Authority (APRA), you need a valid Will and a valid death benefit nomination, preferably one that is binding. Make sure they’re crafted in such a way that one doesn’t cancel the other out. And remember to update both whenever your circumstances or those of your children change.

It’s also important to understand that only certain people will be eligible to receive your super death benefits, and that there will be different tax consequences depending on the age of the beneficiaries you nominate and/or their relationship to you.

Learn more about who can receive your super death benefits.

Read about the tax payable on super death benefits.

Mistakes can be costly

In both cases above, Francesca and Erwin had told their family who they wanted to receive their super when they died and in what proportions. Like many parents, they wanted their estate split evenly between their adult children.

But a lack of correct documentation meant their wishes weren’t carried out. The legal disputes that followed were not only financially costly, presumably the emotional fallout was equally devastating.

Good to know: Complaints about death benefit payments made by APRA-regulated funds can be taken to the Australian Financial Complaints Authority (AFCA), except for some exempt public sector funds. AFCA can’t deal with complaints relating to SMSFs which must be dealt with through the courts.

Professional advice may be cost-effective

Estate planning and the interaction between Wills and super can be complex. Today’s families can be equally complex, with blended families and divorce increasingly common.

In many cases, timely professional advice from your family lawyer/solicitor, financial adviser and/or accountant could save your family going through the uncertainty and emotional stress of a disputed estate.

Learn about what advice your accountant can provide.

SMSFs in a league of their own

If you have an SMSF, make sure the trust deed is up to date. Also ensure you have mechanisms in place to prevent your surviving partner or one of your children abusing control over your death benefits to deprive your chosen beneficiaries of their inheritance.

Learn more in our SMSF estate planning section.

And remember, objections to SMSF death benefit payouts can’t be taken to the Australian Financial Complaints Authority (AFCA) but will end up in the courts.